A Designation with Fiduciary Muscle

“We’re like a Good Housekeeping Seal of approval for financial services,” Carlos Panksep, managing director of the Centre for Fiduciary Excellence (CEFEX), tells PLANADVISER. With a growing number of applicants, the designation functions as a sort of quality control for the financial services industry.

The organization emulates the international standard ISO/IEC 17021, which outlines business, government and society standards, Panksep explains. “In most industries, there are published standards for quality,” he notes. The ISO provides a host of public standards, and CEFEX operates the same way, issuing certifications that are based on set standards.

The fiduciary aspect of financial services is critical, and CEFEX has a strong interest in firms that serve the retirement industry because of its highly regulatory nature. CEFEX works with investment fiduciaries and industry experts to improve risk management for institutional and retail investors, and certification helps determine the trustworthiness of investment fiduciaries, Panksep says.

In the last three months, CEFEX granted six certifications to advisers, compared with two certifications for the same period a year ago. In 2013, a total of 11 certifications were given. The designation has been given out for eight years, and two substantial broker/dealers, LPL and NFP, have both given weight to the organization. NFP entered a strategic relationship with CEFEX to provide resources for its advisers to gain certification.

Most of the adviser registrations—65 total, according to Panksep—are for smaller firms that serve the small to midsize plan market, with plan assets under $100 million, although a few manage plans with $100 million to $200 million in assets. They are an elite group, he says, but they represent about $100 billion in invested assets, a combination of institutional and individual assets.

Panksep describes these smaller advisers as “quite transparent.” Some seek the designation in order to demonstrate that they are above-board. “The program creates transparency and leads to accountability for the adviser,” he explains.

Select Group

Not everyone who applies for the designation receives it. It is rare, Panksep says, but some firms do not pass the audit. “Typically they know what to expect because it’s an open standard,” he says. Anyone can prepare adequately, but adherence to a fiduciary standard is especially critical. A former investment adviser who was an outspoken 401(k) fiduciary advocate but who was later found to have seriously breached his fiduciary responsibilities did not make the cut.

At a recent informational meeting with the Securities and Exchange Commission (SEC), Panksep says the SEC acknowledged that CEFEX could be a helpful mechanism to help determine the risk of an adviser. “They believe there are methods and systems to help the SEC understand how to prioritize which advisers to examine,” he says. “Having a private market drive assessment complements the SEC’s compliance program.”

Panksep points out that the industry is going through a lot of discussion and debate about the right standards of practice. “Suitability versus the fiduciary standard creates a fog,” Panskep notes. “This certification allows an adviser to say, ‘Regardless of everything, here’s a fiduciary standard that we adhere to. And we adhere to it sufficiently that we allow an independent party to come in and audit our books.’ ”

Doug Prince, CEO of ProCourse Fiduciary Advisors, says the firm sought the designation because it specializes in the retirement fiduciary space, and the certification lends credibility to their operations. The process was not cheap. Prince says the firm had to hire an outside accredited investment fiduciary analyst (AIFA) to conduct the CEFEX audit, and gathering the paperwork and data took two to three months.

Fiduciary Analysis

The process involves work and planning, according to Prince. It is not immediate or quick, but it was worthwhile to help track the consistency of products and services they deliver. Hearing from an independent appraiser that the firm indeed delivers what it tells its clients it delivers was a comfort. Prince says also that the designation helps his firm to differentiate its service and model from that of other advisers, as well as from a fiduciary perspective.

Panksep says advisers often explain to plan sponsor clients that an adviser with the certification can help in the documentation process, since plan sponsors are obligated to conduct due diligence on their service providers and this brings the benefit of additional due diligence.

Prince says that in addition to a helpful value-add for plan sponsor clients, in some rare cares, the client’s fiduciary liability provider may even charge lower fees for working with an adviser whose process has been vetted and analyzed, and is therefore less risky.

Going through the examination and audit led Prince’s firm to make a few minor tweaks in language in a client’s investment policy statement, in one case. The process helped to validate that the firm is acting soundly because someone who has looked at other advisers can help improve other’s practices. “It brought some things to light,” he says. Nothing was wrong, but language could be added or reworded to improve it.

“Anytime you can get another adviser to look at everything and give us comments on how we’re doing—how is that a bad thing?” Prince asks. “We’re just trying to do the best we can for clients, and any advice we get is helpful. We think it’s important to have someone come in and look at our clients to see that we’re actually doing the things we say we’re doing. It puts our clients in the best position possible.”